This is a short revision video on the economics of the PFI. Private Finance Initiative (PFI) changes the model of funding for large-scale investment projects. PFI was first launched in 1992 by a Conservative government and was extended heavily by the Labour government of 1997-2010. By 2011, more than 700 hospitals, schools, prisons and other public sector projects had been built under the PFI scheme. But PFI has become less common in recent years in part because of fierce criticism of it as a way of financing and delivering capital projects on behalf of the state.

2. • 3.3.1 What objectives do firms have?
• 3.3.2 Why do firms grow?
• 3.3.3 How can we calculate the revenue of a firm?
• 3.3.4 How can we calculate the costs of a firm?
• 3.3.5 What is meant by efficiency?
• 3.3.6 What is meant by profit?
• 3.3.7 What barriers exist to firms entering and leaving markets?
• 3.3.8 What do we mean by market concentration?
• 3.3.9 What determines the behaviour of firms?
• 3.3.10 How does the threat of competition affect a firm’s behaviour?
• 3.3.11 Why does the government intervene in markets to maintain
competition?
EdExcel A2 Micro Unit 3 Content

3. The Private Finance Initiative (PFI)
Topic 3.3.11
Students should be able to:
• Students will need to be aware of various types of private
sector involvement in public sector organisations, including:
• Contracting out
• Competitive tendering
• Public private partnerships (PPP/PFI)

4. The Private Finance Initiative (PFI)
• Private Finance Initiative (PFI) changes the model of
funding for large-scale investment projects
• PFI was first launched in 1992 by a Conservative
government and was extended heavily by the Labour
government of 1997-2010.
• By 2011, more than 700 hospitals, schools, prisons and
other public sector projects had been built under the PFI
scheme
• PFI encourages private investors manage the design, build,
finance and operation of public infrastructure such as new
schools, hospitals, social housing, defence contracts,
prisons and road improvements.
• The typical PFI contract is repaid by the government over
a 25-30 year period

5. The Private Finance Initiative (PFI)
Under a Private Finance Initiative (PFI) project:
1. Government takes competitive bids for and then buys a whole
investment project package
2. The project package typically includes construction, services and
maintenance once completed
3. The government pays back the costs of the whole project over a
set period of time

6. PFI has declined since peak in 2007/08

7. Private Finance Initiative (PFI)
Alder Hey - Liverpool
The new £167m hospital, which is being built on behalf of Alder Hey Children’s
NHS Foundation Trust, will have a floor area of 51,000m2, and will contain 270
beds and 16 state of the art operating theatres. 75% of bedrooms will be single
occupancy with en-suite bathrooms, improving privacy and dignity for patients
and their families.

8. The Case for the PFI
Efficiency: Argument
that private sector
providers are more
productively efficient
Extra investment -
brings long term
economic and social
benefits e.g. increasing
the stock of capital
Delivery: The private
sector is not paid until
the asset has been
delivered under fixed
price contracts
Using a consortium of
private firms to
complete a project is
more dynamically
efficient in long run

9. Criticisms of the Private Finance Initiative
Debt costs: financing costs of PFI are typically 3-
4% over that of government debt yields
Inflexibility and poor value for money: Long
service contracts are difficult / costly to change
Risk: The ultimate risk with a capital project lies
with the government (i.e. taxpayers)
PFI has added to public sector debt but created
many private sector fortunes especially in
construction & consultancy (corruption risk?)

10. Cross Rail Project – PFI Ditched in 2013
In 2013 the UK government scrapped plans to purchase the Cross Rail rolling
stock as a private finance initiative and decided to finance it fully on Transport
for London’s balance sheet. That decision was prompted by concerns about how
long it had taken to get previous PFI train deals financed, including Thames Link

11. The Edinburgh PFI Schools Controversy
In the spring of 2016, 17 Edinburgh schools built under PFI were shut after
potentially dangerous building faults were discovered.

12. Long Run Fiscal Cost of PFI in the NHS
• 104 NHS trusts in England will
have to pay private companies
£1.96 billion by the end of
2015-16 for PFI deals – enough
to pay for treatment of cystic
fibrosis patients for 20 years.
• The PFI deals financed
£11.8 billion in building
hospitals in England but will
cost £79 billion to pay back
over 31 years – equivalent to
almost £4,000 per household
in Britain
• Four private firms will be paid
£39 billion over the course of
the PFI deals, and almost
£1 billion this year.

13. PFI and Government Failure
• PFI gets stuff built, but badly
negotiated contracts in the past
have left education and NHS
budgets carrying onerous long-term
costs in some instances, not always
for the right sort of building either.
Whether it is over-ambitious IT
projects that fail to deliver (if they
even get that far) or Thames garden
bridges in the wrong place, lobbyists
and contractors are always trying to
sell flash schemes to ambitious or
susceptible ministers and officials.”
• Source, Michael White, The
Guardian, March 2016